2014 has been heralded as the year for crowdfunding. There are literally hundreds of platforms for people to choose from, but with share-based crowdfunding on the rise, consumers and small businesses are faced with a difficult choice.
Traditional crowdfunding platforms have huge user bases, tailored for product-based start-ups, which means that if you are lucky enough to make it onto the ‘Popular’ feed, your business idea will be viewed by millions. If, on the other hand, you don’t instantly capture the imagination of would-be investors, your chances of getting funded through these types of crowdfunding sites tends to decrease significantly.
While traditional crowdfunding platforms with product-based models might be good for getting consumer-focused propositions backed, they are less effective when it comes to B2B companies, which may have products and services that are less appealing to the traditional crowdfunding investor.
The biggest issue with well-established crowdfunding sites is the high commission demanded – typically between 5% and 10%. Bootstrapped start-ups need all the financial help they can get and this is one of the many reasons we and other small businesses are increasingly choosing to go it alone with DIY crowdfunding.
One of the greatest benefits of DIY crowdfunding is the information businesses receive about their backers. Where traditional crowdfunding focuses on getting the money through the door, you won’t know necessarily why or where your product adds value to those people.
By setting up your own crowdfunding site or even by looking for VC funding, that market research data is more readily accessible. Moreover, it enables the business to constantly better itself and innovate based on feedback from the customer, business or angel.
One of the biggest problems with most crowdfunding platforms that have recently been damaging start-up businesses is being over-funded. Although some of the most recently built sites such as CrowdCube are able to trade in shares, traditional product-based crowdfunding platforms do not. This means that businesses opt to give something else away in return for investment – usually the product itself.
This isn’t often an issue for most businesses because the funding provides the opportunity to scale production. However, when campaigns are grossly over-funded, this can cause problems with meeting the demand for products in exchange for funding, rather than focusing on ‘paying’ clients.
Examples of this can be found all over traditional crowdfunding platforms and can cause massive delays for the business. While some may view this as a justifiable sacrifice, there are risks involved with this that can impact on the successfulness of the business’ future. You can spend so long fulfilling those owed orders that you’ll never have time to fulfil any new ones.
The huge user bases of popular crowdfunding platforms still make them a very attractive option. That said, as fewer start-ups are willing to give up such a large percentage of their funding in commission it isn’t difficult to see a future in which start-ups primarily use their own platforms for serious funding.
In-house developers within tech start-ups make creating self-funding platforms a realistic proposition, particularly if it provides flexibility and information as well as funding. These DIY crowdfunding platforms also provide the consumer with a much more interesting investment opportunity: not only being able to buy the product, but also buy shares in it.
Perhaps the product-based crowdfunding model isn’t broken just yet, but with more and more small businesses creating self-funding platforms, to crowdsource more serious investment, it can certainly be argued that the writing may be on the wall – especially in the B2B space.
As the retail sector suffers ever more and empty shops on the high street become another pop-up project, we may at least take some comfort from the crowdfunding phenomenon that is spreading like wildfire.
From projects on art to Zulu history, it seems nothing is taboo for this method of funding. Even ‘adult services' are now offered via some crowdfunding platforms.
Are there any business models that are not appropriate for crowdfunding? Not in my opinion. Now this doesn't mean automatic success for the campaign or the project leaders. But with the four main crowdfunding models now well established the concept is open for business and incremental shifts in our socio-economic patterns are beginning to emerge.
This isn’t a call for all start-ups to get online and find the most appropriate platform, but it is a call for deeper consideration of the model in any stage of a business.
Warnings have been issued by the Department for Business, Innovation and Skills over the potential for funders in the equity model to invest blindly in businesses that stood no chance of success. But is this simply another instance of the government playing catch-up with market trends and forces?
Across the pond these issues are coming to the fore under the aptly named JOBS Act (Jump Start Our Business Start-ups), where again the issues of risk are being cited as a reason to attempt to limit the market on behalf of the consumer.
Our government shouldn't be given an easy time on this issue. We are talking about a minority of people in the population who would be willing to seek out and invest in these kinds of opportunities. Even if these numbers increased significantly, each individual would probably only be investing relatively small amounts.
Guidelines are certainly needed but guidelines are different from enforced restrictions.
Chris Buckingham is a PhD candidate on crowdfunding at University of Southampton and has taught crowdfunding and entrepreneurship at the University of Winchester at both undergraduate and postgraduate levels.